Earlier this year, Governor Newsom signed Assembly Bill 5. This new law codifies the “ABC” test, adopted by the California Supreme Court in Dynamex Operations v. Superior Court (2018) 4 Cal. 5th 903, as a new means of determining whether a worker should be classified as an employee or an independent contractor. The distinction between employees and independent contractors is significant, because employees are entitled to minimum wage, overtime pay, unionization, and other protections that are not afforded to independent contractors.
The Dynemex decision overruled the long standing multi-factor common law test for determining worker classification which was established by the California Supreme Court in S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 Cal.3d 341. The Borello test primarily focused on who exerted control over the work performed.
The new “ABC” test (so named to signify the three prongs of the test) is a significant departure from Borello and from employers’ previous understanding of which workers could be properly classified as independent contractors. A.B. 5 begins by stating that, unless all three prongs of the ABC test are satisfied, “a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor.” Thus, the burden of proof as to whether a worker is properly classified now falls squarely upon the employer, since workers are presumed to be employees. To overcome this presumption, the employer must prove all of the following:
Part B of the ABC test is likely to have the biggest impact, since it suggests a business cannot use independent contractors to do anything that the business uses employees to do, or that is otherwise central to the business. This is the most drastic difference from the Borello test.
A.B. 5 creates several exemption categories, each reflecting specific industry issues and containing their own stringent and complex set of requirements. Workers who meet the specific requirements of an exemption must still satisfy the Borello test in order to be classified as an independent contractor.
One exemption category covers specific occupations. It covers physicians, veterinarians, lawyers, private investigators, accountants, and others.
Another exemption category pertains to certain contracts for “professional services.” This includes certain contractual services related to marketing, human resources, cosmetologists, etc. Importantly, this exemption only applies if the hiring entity demonstrates that all of the following conditions are satisfied:
Another important exemption category is for certain bona fide business-to-business contracting relationships. Subject to certain qualifiers, if a business service provider contracts to provide services to another business (“contracting business”), an exemption will apply if the contracting business meets all of the following conditions:
In conclusion, A.B. 5’s passage is controversial, with many speculating that it will effectively topple the gig economy in California. Whatever the impact, it is clear that A.B. 5 will substantially limit the use of independent contractors in California. Assuming workers do not fall under one of the exemptions listed in A.B. 5, employers should consider whether reclassifying those workers as employees is appropriate.